The April 2007 issue of the magazine Fast Company has a very interesting article illustrating the high price of engaging in a pricing war.
Ebrahim Currim & Sons http://www.stagumbrellas.com/ of India has been manufacturing high quality umbrellas since 1860 through their popular brand Stag Umbrellas. They are a leading umbrella manufacturer in India known for the quality of their products.
Towards the end of the 20th century, however, India was deluged with cheap imported umbrellas from China. Prices of umbrellas plummeted. To remain competitive, Ebrahim Currim & Sons decided to join the fray and slash their prices, and to do so, they sacrified the quality of their products.
Instead of their hoped-for improvement in sales because of the lower prices, the company’s decision to scrimp on the quality of their umbrellas backfired. For the first time since 1940s, they lost money. The company realized that sacrificing quality to lower the price turned away their customers. They turned away from their main selling point — which was quality.
The company reversed their strategy and abandoned the pricing competition. Instead they focused on innovation, expanding their products from traditional black umbrellas to funky and cool designs. In addition, they decided to jump in on the branding bandwagon and created umbrellas for companies who would pay to have their logos on the umbrellas. They even produced umbrellas with built in flashlights as well as prerecorded tunes.
Along with these premium features of course came premium prices. Even their classic black umbrellas are now priced 15% higher than the imports from China. But the company’s return to quality pushed them back into profitability, and business has never been so good.
Businesses change their strategies in order to survive, and some of these strategies work while others fail. The experience of this Indian umbrella maker should serve as an inspiration to all of you trying to figure out how to compete in the pricing wars your competitors are waging. Remember: the lowest price does not always win.